During a recent month, Cleveland Company planned to provide cleaning services to 30 customers for $25 per hour. Each job was expected to take 3 hours. The company actually served 10 more customers than expected, but the average time spent on each job was only 2.5 hours each. Cleveland's revenues for the month were

• a.$250 more than expected.
• b. $250 less than expected.
• c.$750 more than expected.
• d. Cannot be determined from the data given

CF Industries Holdings, Inc. is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The corporation often produces and stores large amounts of inventory during periods of low demand to ensure that there is enough product to meet the demand of peak seasons. Assume that one line of fertilizer (with no beginning Finished Goods Inventory) had the following data during a time period of low demand:

$$\begin{array}{lrr} \hline\\ \text{Sales price}&\text{\$\hspace{5pt}20.00 per case}\hspace{14pt}\\ \text{Variable manufacturing costs}&\text{4.00 per case}\hspace{14pt}\\ \text{Fixed manufacturing costs}&\text{100,000 per quarter}\\ \text{Variable Selling and Administrative Costs}\hspace{10pt}&\text{2.00 per case}\hspace{14pt}\\ \text{Fixed Selling and Administrative Costs}&\text{45,000 per quarter}\\ \\\hline \end{array}$$

Given that the time period has low demand, assume the company produced 1,000,000 cases but only sold 250,000 cases.

Prepare the income statement for the quarter using variable costing.

The Hurley Hat Company manufactures baseball hats. Hurley's primary customers are sporting goods stores that supply uniforms to youth baseball teams. Following is Hurley's income statement for 2018:

$$\begin{array}{c} \hline\\ \textbf{HURLEY HAT COMPANY}\\ \textbf{Income Statement}\\ \textbf{\hspace{55pt}Year Ended December 31, 2018\hspace{55pt}} \end{array}$$

$$\begin{array}{lrr} \hline\\ \text{Net Sales Revenue}&\text{\$\hspace{5pt}1,500,000}\\ \text{Cost of Goods Sold}&\underline{\text{\hspace{18pt}700,000}}\\ \text{Gross Profit}&\text{\hspace{5pt}800,000}\\ \text{Selling and Administrative Expenses}\hspace{55pt}&\underline{\text{\hspace{18pt}500,000}}\\ \text{Operating Income}&\text{\underline{\underline{\$\hspace{13pt}300,000}}}\\ \\\hline \end{array}$$

In 2018, Hurley produced and sold 200,000 baseball hats. Of the Cost of Goods Sold, $150,000 is fixed; 80% of the Selling and Administrative Expenses are fixed. There were no beginning inventories on January 1, 2018. The company is considering two options to increase sales.

• Option 1: The company is operating at 100,000 hats below full production capacity and is considering increasing advertising to increase sales to the production capacity level in 2019. The marketing director predicts that an additional$100,000 expenditure for advertising would increase sales to 300,000 hats per year.
• Option 2: The sales manager has been negotiating with buyers for several national sporting goods retailers and recommends the company expand production capacity to 400,000 hats in order to secure long-term contracts beginning in 2019. The expansion is expected to increase fixed manufacturing costs by $200,000 per year. Additionally, the retailers are requesting a higher-quality hat and the changes to the hat materials and manufacturing process would increase variable manufacturing costs by$1 per hat for the additional 200,000 hats. (The original 200,000 hats manufactured and sold would not be affected by this change.)

Requirements

1. Use the data from the 2018 income statement to prepare an income statement using variable costing. Assume no beginning or ending inventories. Calculate the contribution margin ratio. Round to two decimal places.
2. Prepare an absorption costing income statement assuming the company pursues Option 1 and increases advertising and production and sales increase to 300,000 hats.
3. Refer to the original data. Prepare an absorption costing income statement assuming the company pursues Option 2 and increases capacity and sales and production increases to 400,000 total hats.
4. Which option should the company pursue? Explain your reasoning.

In 100 words or fewer, explain the main differences and similarities between variable and absorption costing.

Classify each cost by placing an X in the appropriate columns. The first cost is completed as an example.

The primary difference between variable costing and absorption costing is

• a. in variable costing, fixed manufacturing overhead is a product cost.
• b. in absorption costing, fixed manufacturing overhead is a product cost.
• c. in variable costing, variable selling and administrative costs are product costs.
• d. in absorption costing, fixed selling and administrative costs are product costs.

Sampson Company operates a manufacturing facility where several products are made. Each product is considered a business segment, and the product managers have the opportunity to receive a bonus based on the profit of the segment. Franco Hopper is the manager for the scissors product line. Production and sales data for the scissors product line for the past three years are shown below:

$$\begin{array}{lccc} \hline &\textbf{Year 1}&\textbf{Year 2}&\textbf{Year 3}\\ \hline\\ \text{Units produced}&\text{100,000 units}&\text{125,000 units}&\text{160,000 units}\\ \text{Units sold}&\text{100,000 units}&\text{100,000 units}&\text{100,000 units}\\ \hline\\ \text{Sales price per unit}&\text{\$\hspace{10pt}12.00 per unit}&\text{\$\hspace{10pt}12.00 per unit}&\text{\$\hspace{10pt}12.00 per unit}\\ \text{Variable manufacturing cost per unit}&\text{\hspace{20pt}5.00 per unit}&\text{\hspace{20pt}5.00 per unit}&\text{\hspace{20pt}5.00 per unit}\\ \text{Total fixed manufacturing costs}&\text{\hspace{5pt}200,000 per year}&\text{\hspace{5pt}200,000 per year}&\text{\hspace{5pt}200,000 per year}\\ \\\hline \end{array}$$

Hopper's bonus is 0.5% of the gross profit of the scissors product line, based on absorption costing. Upper management is discussing changing the bonus system so that bonuses are based on operating income using variable costing. Hopper is opposed to this change and has been trying to convince the other product managers to join him in voicing their opposition. There are no beginning inventories in Year 1.

Requirements

1. Calculate the fixed cost per unit produced for each year.
2. Prepare income statements for the three years using absorption costing.
3. Calculate Hopper's bonus based on the current plan.
4. Prepare income statements for the three years using variable costing.
5. Calculate Hopper's bonus based on the proposed plan.
6. Give possible reasons why Hopper is opposed to the proposed bonus plan. Do you think Hopper's actions have been ethical for the past three years? Why or why not?

On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.

Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.

On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry’s management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.

The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.

Instructions

• a. What is the meaning of “discounted value of expected net receipts”? Explain.
• b. How would such a value be calculated for net royalty receipts?
• c. What basis of valuation for Ferry’s patents would be generally accepted in accounting? Give supporting reasons for this basis.
• d. Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
• e. What would be the preferable theoretical basis of amortization? Explain.
• f. What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss.

Based on the information given in the previous exercise, those who responded that they planned to buy something were asked what they intended to buy. Here is a list of their responses:

1. Home improvement project
2. Purchase appliances
3. Purchase automobiles
4. Purchase clothing
5. Purchase electronics
6. Purchase furniture
7. Purchase gas
8. Spa or salon time
9. Purchase groceries
10. Purchase vacation
11. Impulse purchase
12. Down payment on house

Graphically summarize these data.

Assume that you are on the board of directors of a company that has decided to buy 80 percent of the outstanding stock of another company within the next three or four months. The discussions have convinced you that this company is an excellent investment opportunity, so you decide to buy $10,000 worth of the company’s stock for your personal portfolio. Is there an ethical problem with your decision? Would your answer be different if you planned to invest$500,000? Are there different ethical considerations if you don’t buy the stock but recommend that your brother do so?

The partners share equally in all changes in equity. For the situation, prepare the appropriate journal entries to admit a new partner on June 1 of the current year. A cash receipts journal and a general journal are provided in the Working Papers. Source documents are abbreviated as follows: memorandum, M; receipt, R.

Marie Henson and Bobby Edwards each have $40,000.00 of equity. Cindy Yates will pay the partnership$34,000.00 cash for a one-third share in the business. R135 and M38.

Bjork Larsen was trying to decide whether to use a new racing wax for cross-country skis. He decided that the wax would be worth the price if he could average less than 55 seconds on a course he knew well, so he planned to study the wax by racing on the course 8 times. His 8 race times were 56.3, 65.9, 50.5, 52.4, 46.5, 57.8, 52.2, and 43.2 seconds. Should he buy the wax? Explain by using a confidence interval

Wright Company deposits all cash receipts on the day when they are received and it makes all cash payments by check. At the close of business on May 31, 2017, its Cash account shows a $27,500 debit balance. The company's May 31 bank statement shows$25,800 on deposit in the bank. Prepare a bank reconciliation for the company using the following information.

a. The May 31 bank statement lists $100 in bank service charges; the company has not yet recorded the cost of these services.
b. Outstanding checks as of May 31 total$5,600.
c. May 31 cash receipts of $6,200 were placed in the bank's night depository after banking hours and were not recorded on the May 31 bank statement.
d. In reviewing the bank statement, a$400 check written by Smith Company was mistakenly drawn against Wright's account.
e. The bank statement shows a $600 NSF check from a customer; the company has not yet recorded this NSF check.

A cash receipts journal and a cash payments journal are provided in the Working Papers. Source documents are abbreviated as: check, C; receipt, R.

Using the current year, journalize the following transactions.